The interbank call money rate on Wednesday surged to a record 5.48%, with banks rushing to collect liquid cash in the face of rising demand ahead of Eid-ul-Azha, according to the latest data from the Bangladesh Bank.
The previous peak was recorded on 20 June 2020 when the rate stood at 5.17%.
Between 13 and 20 June last month, the weighted average rate in the call money market, where banks borrow from each other on an overnight basis, hovered between 5.01% and 5.03%, according to an analysis of central bank data.
Industry insiders say growing liquidity crisis apart, the two consecutive rises in repurchase agreement (repo) rate also contributed to a big jump in the call money rate.
On 30 June, the central bank raised its key interest rate by 50 basis points to 5.50% – a record hike in recent history – as part of its efforts to keep inflation in check. A month ago on 29 May, it increased the rate to 5% from 4.75%.
In pandemic times, the overnight rate in the call money market plummeted to a record low amid tepid demand and the market was awash with excess liquidity. With Covid-19 having turned the corner, consumers began to release their pent-up demand, driving businesses to high imports.
That is why banks had to heavily purchase greenbacks from the central bank to settle import payments, which led to a gradual crisis of liquid money in the banking system, say bank officials.
The cash shortage has now exacerbated as banks continue to purchase dollars from the central bank amid a lower deposit growth.
The banks purchased $7.62 billion from the central bank in exchange for more than Tk30,000 crore in FY22.
The latest available data show that excess liquid assets declined from Tk2,315 billion to Tk1892 billion in May 2022, mainly because of a reduction in excess reserves from Tk625 billion to Tk220 billion, according to the central bank's latest monetary policy statement.
"We were a lead money lender in the money market. We are now in a liquidity crisis as we spent a large amount of dollars in opening government and private LCs," a high official of a state-owned bank told The Business Standard.
He also linked the liquidity crisis to rising cash demand ahead of Eid-ul-Azha and a 100% cash margin for opening LCs.
The Bangladesh Bank has imposed a 100% cash margin for opening letters of credit (LCs) on cars, electronics, gold, precious metals, RMG, and pearls, among other items, to discourage imports in a bid to keep the country's currency and debt management more integrated and stable.
A Sonali Bank high official said the government's higher bank borrowing to meet the budget deficit is another reason for the liquidity crisis.
In FY22, the government borrowed around Tk65,000 crore from the banking system, which was almost double the amount it took in FY21.
Banks purchased $7.62 billion from the central bank in the just-concluded fiscal 2021-22, according to the monetary policy statement.